Graph of the Day: Collapse of US shale oil industry

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The number of rigs deployed in US shale industry has collapsed in just three months. The numbers simply don’t stack up for more investment.

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Since the collapse in oil prices began in the middle of last year, all eyes have been on how the oil industry responds. Already, some $200 billion of projects have been either axed or deferred, mostly because they cannot compete on costs.

The US shale oil industry is also suffering. This graph below from industry analysts Baker Hughes shows the dramatic fall in the number of rigs operating in the US shale industry.

shale rigs

In just three months, the rig count has fallen by 24 per cent, or 389 from the all-time high of 1,609 recorded for the week of 10 October last year. As Mark Lewis, from Paris-based analysts Kepler Chevreux notes:  “In all of the historical Baker Hughes data stretching back to July, 1987,  there is no precedent for a drop of this speed or severity.”

So, what does this mean?

Lewis notes that the US rig count is a leading indicator of US supply (the more rigs there are, the more supply there will be). For this reason, it is probably the most closely watched single indicator in world oil markets at the moment, as it offers the best guide to what will happen with US shale-oil supply in the months ahead.

That matters because it is the US shale industry that has been the fundamental driver of global crude-oil supply in the last five years, and without the huge surge in shale oil since 2009 global crude-oil output would actually have been lower in 2014 than it was in 2005. This is the very supply that the Saudis and other OPEC members have been targeting.

What the sudden drop in rig count suggests, Lewis says, is that the market is starting to re-appraise the shale-oil model, derided by some as some sort of giant “Ponzi” scheme, because of its reliance on capital recycling and new drilling to replace the wells that exhaust themselves within a year or two.

The significance of this is that predictions of the shale bubble may now come true. As David Hughes, the the Post Carbon Institute, wrote in his analysis “Drill, Baby, Drill”, there were always questions about how sustainable the shale revolution was going to be.

“First, shale gas and shale oil wells have proven to deplete quickly, the best fields have already been tapped, and no major new field discoveries are expected,” he wrote in 2013.

“Thus with average per-well productivity declining and ever-more wells (and fields) required simply to maintain production, an “exploration treadmill” limits the long-term potential of shale resources.”

Hughes noted that by late 2011, the best fields were already in decline. By 2012, the very high decline rates of shale gas wells requires $US42 billion per year to drill more than 7,000 wells— just to maintain production. Yet, in 2012, the value of that shale gas production was just $US32.5 billion.

The collapse of the oil price appears to have brought a premature, but entirely logical, end to the boom.

As Hughes noted then: “At best, shale gas, tight oil, tar sands, and other unconventional resources provide a temporary reprieve from having to deal with the real problems: fossil fuels are finite, and production of new fossil fuel resources tends to be increasingly expensive and environmentally damaging.

“Fossil fuels are the foundation of our modern global economy, but continued reliance on them creates increasing risks for society that transcend our economic, environmental, and geopolitical challenges. The best responses to this conundrum will entail a rethink of our current energy trajectory.”

 

 

 

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20 Comments
  1. juxx0r 5 years ago

    Who doesn’t like a bit of ponzu?

    Ponzu (ポン酢) is a citrus-based sauce commonly used in Japanese cuisine. It is tart, with a thin, watery consistency and a dark brown color.

    • John Higson 5 years ago

      great replacement for vinegar in salad dressing!

    • SaveString 5 years ago

      Ah, we KNEW hydrofracking for shale gas was a ponzu scheme!
      (Huge transport pipelines too, remaining, and possibly leaking remaining toxicities, throughout the disrupted communities after the shale gas from increasing short-term wells has long since been exhausted. Block them all…)

  2. Hugh Sharman 5 years ago

    True enough. There is no sense in drilling for expensive oil so shortly shale oil/gas extraction rates will tumble. On the other hand, Global oil and gas demand is still rising, of course, if more slowly than most analysts were expecting! So the moment demand exceeds supply again, expect a big rebound in oil/gas price and a resumption of drilling.

    Albeit on a more cautious scale. Those rigs are not going to be scrapped.

  3. Alan Baird 5 years ago

    So temporary for so much disruption. Roll on with more renewables. Fade fossil fuel out.

    • Mark Jackson 5 years ago

      Hopefully the collapse of Coal Seam Gas in Australia will happen soon too, even with both the corporate parties still supporting it.

  4. Vera Scroggins 5 years ago

    more good news; so much disruption in my county in Pa.. 1100 gas wells, 40 compressor stations, hundreds of miles of high-pressure gas pipelines and next to homes, on farms, on school property and more cases of water contamination and degradation of our air quality and health impacts…..all, this so some folks can make a quick buck and avoid transitioning to renewables, which we should have done in the 60’s….

  5. Doug Hendren MD 5 years ago

    This is entitled “Collapse of US Shale Gas..”, but the discussion is about shale oil. It makes sense that they are tied together technologically, but their markets are entirely different. Can anyone clarify exactly how low oil prices are affecting natural gas? Thanks.

    • Giles 5 years ago

      Yep, headline should have been gas, not oil. Gas prices have been falling as well, so much so that one major LNG project in Australia will now not go ahead.

  6. DogzOwn 5 years ago

    Of course, you’d expect the big lifters in the shale industry to be totally committed to maintaining such valuable infrastructure. Authorities would surely have asked them to lodge sizeable security bonds, in case they might default. As low grade mild steel well casing rusts, rots and crumbles, look out for centuries worth of aquifer contamination.

    • Kaya 5 years ago

      How will oxygen get down 2km into the shales and why would it react with the steel rather than the methane?

  7. Kaya 5 years ago

    Group think.

    EIA shows most recent data for the shales it monitors as very close to 45 bcf/d of nat gas and 5.4mbpd of oil

    at $3/mmbtu that gives a value ~$4.1B per MONTH and at $45 oil a value of ~$7.4B per MONTH

    So combined the revenue of the USA shale industry at current prices is somewhere ~$11.5 B a month

    Somewhere in the region of 500 wells a month can keep production at about current levels. With wells costing now as little as $5-7M that gives a cost of ~$3B

    So income of ~$11.5B
    Cost to replace wells ~$3B

    there is plenty of room in the $8B difference to pay for transport processing and sales of the oil and gas and to leave a profit too

    • sbean 5 years ago

      And if oil doesn’t stay above $45 for long? And as those other wells deplete rapidly? What’s your prognosis?

      • Kaya 5 years ago

        Its very easy sbean, the USA is a huge consumer of nat gas. It can’t import anywhere close to its shale gas production nor can the rest of the world export that quantity.

        So if you subscribe to the view that shale GAS is unprofitable at todays prices that does not mean the end of shale gas it means the beginning of more expensive nat gas to makethe shale gas profitable

        That is easy to see and understand

        oil is slightly more complicated because it is easier to transport than gas and there exists in the world lots of international oil trade via tankers.

        If you think shale oil is unprofitable at $45 (or whatever figure) then oil shale drilling will stop however as we mentioned gas shale drilling WONT stop. So when oil goes above that figure the industry exists and will just redeploy to oil shales

        and finally if we look at the EIA data we see first year production for thrle shale gas wells as something around $7m worth at $3/mmbtu. The same for oil shales sees some 200k barrels of oil. $7m / 200k barrels = $35 a barrel.

        That is to say I think shale will continue at prices of $30-35 as that is what has been happening for the last few years for nat gas

        • sbean 5 years ago

          Regarding natural gas (which isn’t what I asked about, but no matter), you left demand out of the consideration. The “beginning of more expensive nat gas” won’t arrive until demand rises, so shale gas won’t be (more?) profitable until then. That might be soon, and I don’t know that shale gas is currently *not* profitable. The likely demand trend isn’t upward. See below.

          As for shale oil, I think it’s unprofitable at various levels below roughly $85, depending on the site. All plays are not equal and all wells are not equal, and perhaps most importantly, all companies are not equal in terms of financial backing. And again, price is determined in part by demand, which is very unlikely to increase significantly with the cascading economic impacts that are getting underway with the idling of rigs and laying off of workers.

      • Kaya 5 years ago

        My view is oil would need to go below $25 and stay there for at least two years to cut the shale industry to sub 1mbpd oil output. (And if prices subsequently go up shale oil output will grow again so it isn’t a death knockout to the industry its a pause)

        But lets ask you this, the world will need some +10mbpd extra oil in ten years as the poor nations develop. Those predicting the end of shale oil must thus think that some other nation/s will meet this 10mbpd AND another 5mbpd lost from shale oil demise. So which nations are going to produce these +15mbpd of oil??

        • sbean 5 years ago

          None. Demand is what you can afford, not what you want. That’s especially true in energy terms in addition to money terms, but it will be money terms that stand in the way in the short term. This looks like peak liquids production this year.

          • Kaya 5 years ago

            But generally speaking as nations develop they also develop the ability to source resources.

            For instance if anyone suggested just 30 years ago China could develop a coal industry that could mine 4-5 billion tons of coal each year that would have been a laughable projection so far fetched. But today that is what happens.

  8. Kaya 5 years ago

    Shale gas will survive in the USA in large quantities because there no way to import a similar quantity of LNG especially without increasing world prices drastically.

    If the shale gas process is unprofitable it doesn’t mean the end of shale gas, it means the beginning of higher nat gas prices to allow shale gas to be profitable

  9. Ojete Calor 5 years ago

    FFM. Fracking Funeral March.

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